Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

The latest data from both the Bank of Japan (BoJ) and the Japanese Bankers Association (JBA) confirm the trend that we noted in earlier Smartkarma Insights on Japanese bank lending, namely that lending by the major banks continues to decline in terms of the outstanding loan balance since reaching a peak in June, even though YoY growth rates remain high compared to previous years.Total loan outstandings have fallen in five of the last six months (November being the exception), primarily because of declining loan balances at the major banks.  The declaration of a State of Emergency in several prefectures, as Japan continues to battle a surge in coronavirus infections, is unlikely to change this trend significantly.  However, as noted in other recent Smartkarma Insights on the outlook for the Japanese banking sector in 2021, these are loans, not grants, and will need either to be repaid in full or, if that becomes impossible, be declared as ‘value impaired’ by the lending banks and properly reserved against.“Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japanese Bank Lending: An Ebb Tide in 2021?

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On Friday after the close, the TSE belatedly released its annual TSE Free Float Weight adjustments for stocks with fiscal year ends in March. Normally this comes out in October, and is executed at the end of October, but for the 2020 Free Float Weight Rebalance, as per an announcement made by the TSE on 22 June 2020, special measures were taken in light of the covid-19 pandemic, and the rebalance was delayed by 3 months. 
There are no major surprises that I see. Some buybacks from the market have led to slightly lower FFW coefficients. Some secondary offerings have led to increases in FFW coefficients. As discussed in <a href="https://www.smartkarma.com/insights/japan-post-insurance-update-three-reasons-to-buy-any-overhang-slightly-higher" target="_blank" data-smartkarma-citation="insights:46862" rel="noopener">Japan Post Insurance Update - Three Reasons To Buy. Any Overhang Slightly Higher</a> on Friday, one of the big names to the buy side is indeed <a href="https://www.smartkarma.com/entities/japan-post-insurance-co-ltd" target="_blank" data-smartkarma-citation="entities:840:1" rel="noopener">Japan Post Insurance (7181 JP)</a>.
For more on the rebalance, read on.
[A spreadsheet of all names and impacts is attached at the bottom of the insight]

On Friday after the close, the TSE belatedly released its annual TSE Free Float Weight adjustments for stocks with fiscal year ends in March. Normally this comes out in October, and is executed at the end of October, but for the 2020 Free Float Weight Rebalance, as per an announcement made by the TSE on 22 June 2020, special measures were taken in light of the covid-19 pandemic, and the rebalance was delayed by 3 months. 
There are no major surprises that I see. Some buybacks from the market have led to slightly lower FFW coefficients. Some secondary offerings have led to increases in FFW coefficients. As discussed in Japan Post Insurance Update - Three Reasons To Buy. Any Overhang Slightly Higher on Friday, one of the big names to the buy side is indeed Japan Post Insurance (7181 JP).
For more on the rebalance, read on.
[A spreadsheet of all names and impacts is attached at the bottom of the insight]

The Delayed TOPIX FFW Rebalance: $32bn To Trade

Coming just two months after the FSC had rejected a proposal by Thai tycoon Charoen Pokphand's holding company to purchase the 24.09% stake in <a href="https://www.smartkarma.com/entities/jih-sun-financial-holdings" target="_blank" data-smartkarma-citation="entities:17971:1" rel="noopener">Jih Sun Financial (5820 TT)</a> held by Hong Kong-based Capital Target Limited, it initially looked to me like the <a href="https://www.smartkarma.com/entities/fubon-financial-holding-co" target="_blank" data-smartkarma-citation="entities:11869:1" rel="noopener">Fubon Financial Holding Co (2881 TT)</a> announcement of a low-premium Tender Offer at NT$13/share to purchase Jih Sun Financial, which camecomplete with regulator pre-approval, was likely wrapped up as a nice package to get Shinsei and Capital Target out without requiring other minorities to sell.  A couple of days afterwards, Fubon noted that it had not made any contact with either of  <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> or Hong Kong-based Capital Target Limited prior to making the offer, but noted that it had wanted to purchase Jih Sun to raise its market share of Taiwanese stock market turnover (from 5.54% to 9.13% by adding Jih Sun's 3.59%). It noted that it would issue new shares - 60% common shares and 40% preferred shares - in order to finance the acquisition.Yesterday, Jih Sun announced the result of its board consideration of the Offer after having obtained the requisite fairness opinions required by Article 14 of the Regulations Governing Public Tender Offers for Securities of Public Companies.Jih Sun noted that it had not discussed the Tender Offer with Fubon prior to Fubon making its offer, and also noted that the accounting firms which had been engaged to provide fair value opinions found that a fair value per share estimated range was NT$13.89-15.71/share, and when looking at the "market price method", the other accountant had suggested the range NT$9.63-16.93/share against the NT$13 Offer. Several days after the announcement of the Offer, the Financial Supervisory Commission noted in response to legislator questions that the FSC was investigating the nature of the spike in share price and volume before the Tender Offer announcement, noting that the FSC itself and its personnel had kept quiet about the deal since October when they started looking at it. The news around this situation suggests my analysis of who owned Capital Target Limited may have been wrong - that a different originally offshore Chinese person may be (or have been) the controller of Capital Target Limited.This makes things a bit weirder.

Coming just two months after the FSC had rejected a proposal by Thai tycoon Charoen Pokphand's holding company to purchase the 24.09% stake in Jih Sun Financial (5820 TT) held by Hong Kong-based Capital Target Limited, it initially looked to me like the Fubon Financial Holding Co (2881 TT) announcement of a low-premium Tender Offer at NT$13/share to purchase Jih Sun Financial, which camecomplete with regulator pre-approval, was likely wrapped up as a nice package to get Shinsei and Capital Target out without requiring other minorities to sell.  A couple of days afterwards, Fubon noted that it had not made any contact with either of  Shinsei Bank (8303 JP) or Hong Kong-based Capital Target Limited prior to making the offer, but noted that it had wanted to purchase Jih Sun to raise its market share of Taiwanese stock market turnover (from 5.54% to 9.13% by adding Jih Sun's 3.59%). It noted that it would issue new shares - 60% common shares and 40% preferred shares - in order to finance the acquisition.Yesterday, Jih Sun announced the result of its board consideration of the Offer after having obtained the requisite fairness opinions required by Article 14 of the Regulations Governing Public Tender Offers for Securities of Public Companies.Jih Sun noted that it had not discussed the Tender Offer with Fubon prior to Fubon making its offer, and also noted that the accounting firms which had been engaged to provide fair value opinions found that a fair value per share estimated range was NT$13.89-15.71/share, and when looking at the "market price method", the other accountant had suggested the range NT$9.63-16.93/share against the NT$13 Offer. Several days after the announcement of the Offer, the Financial Supervisory Commission noted in response to legislator questions that the FSC was investigating the nature of the spike in share price and volume before the Tender Offer announcement, noting that the FSC itself and its personnel had kept quiet about the deal since October when they started looking at it. The news around this situation suggests my analysis of who owned Capital Target Limited may have been wrong - that a different originally offshore Chinese person may be (or have been) the controller of Capital Target Limited.This makes things a bit weirder. 

Fubon Financial Offer for Jih Sun Gets Even Weirder

David Blennerhassett

Last Week in Event SPACE: Shinsei Bank, Huifu Payment, Vedanta, Cardinal Resources, Jih Sun Finance

In May of this year, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> made an <a href="https://www.release.tdnet.info/inbs/ek/140120200430403171.pdf" target="_blank" rel="noopener">announcement</a> that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/shinsei-bank-offering-flowers-in-the-wind" target="_blank" data-smartkarma-citation="insights:31638" rel="noopener">Shinsei Bank Offering: Flowers in the Wind</a>, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/654/original/Screenshot%202020-12-21%20at%207.48.00%20PM.png?1608551293" class="editor-image img-responsive" data-smartkarma-image-id="179654"></figure></section>Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1608551363459&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=8303&amp;oth=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100ITI7" target="_blank" rel="noopener">received</a> 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID <a href="https://pdf.irpocket.com/C8303/yCGV/B6S9/bQ8o.pdf" target="_blank" rel="noopener">announce</a> a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had <a href="https://pdf.irpocket.com/C8303/mxGt/rDGI/qr73.pdf" target="_blank" rel="noopener">purchased</a> 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  </section>Discussion ensues below.

In May of this year, Shinsei Bank (8303 JP) made an announcement that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by Mio Kato in Shinsei Bank Offering: Flowers in the Wind, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director received 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID announce a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had purchased 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  Discussion ensues below.

Japan

The Bank of Kyoto, Ltd. is a regional bank in Kyoto.  The Bank provides banking services including deposits, savings, loans, foreign exchange transactions, and securities investments.  The Bank of Kyoto also provides financial services such as letter of credit, leasing, loans, and credit cards.

Mebuki Financial Group Inc. is a holding company established through the merger of Joyo Bank and Ashikaga Bank. As a financial group, the Company offers deposits, Loans, foreign exchange transactions, commercial and trust banking. Mebuki Financial Group also provides financial services such as letter of credit, credit cards and consulting.

The Hachijuni Bank, Ltd. is a regional bank based in Nagano Prefecture. The Bank provides banking services such as deposits, loans, foreign exchange transactions, and trust accounts. The Bank also provides financial services such as leasing, credit cards, credit guarantee, debt recovery, trading, and venture capital and operates branches overseas.

Rakuten Bank, Ltd. operates as an Internet based bank. The Company provides banking services including deposits, loans, exchange transactions, and other services. Rakuten Bank also provides financial services including investment trusts, securities, credit and cash cards, lottery tickets, and others.

Fukuoka Financial Group, Inc. is a holding company established through the merger of the Bank of Fukuoka and Kumamoto Family Bank. As a financial group, the Company provides banking services including deposits, loans, foreign currency transactions. The Company also provides other financial services such as credit card, letter of credit, and leasing services.

Aozora Bank, Ltd. provides banking services including deposits, savings, loans, foreign exchange transactions, and securities investments. Aozora Bank also provides services such as trust account, resolution and collection, and venture capital.

The 77 Bank, Ltd. is a regional bank in Tohoku area.  The Bank provides general banking services including deposits, loans, and exchange transactions. The Bank also provides others financial services such as securities brokerage, trust banking, letter of credit, leasing, credit cards, and computer services.

The Gunma Bank, Ltd. is a regional bank based in Gunma Prefecture.  The Bank provides banking services such as deposits, loans, and foreign exchange transaction.  The Gunma Bank also provides financial services such as leasing, credit cards, letter of credit, and investment advisory, and develops information systems.

Yamaguchi Financial Group, Inc. is a holding company established through the merger of Yamaguchi Bank and Momiji Holdings. The Group provides variety of financial services such as deposits, loans, foreign exchange transactions, leasing and credit cards.

Kyushu Financial Group, Inc. is a holding company established through the merger of Higo Bank and Kagoshima Bank.  The Bank provides banking services such as deposits, loans, and exchange transactions.  Kyushu Financial Group also provides other financial services including security brokerage, credit cards, leasing, and letters of credit.

Atlantic Union Bankshares Corporation provides banking services. The Bank checking accounts, lending, credit cards, online and mobile banking, and wealth and treasury management services. Atlantic Union Bankshares serves customers in the United States.

International Bancshares Corporation, through its bank subsidiaries, provides commercial and retail banking services through offices in south and southeast Texas.  The Bank accepts deposits from the general public and uses those funds to make a variety of loans.

Fulton Financial Corporation is a multi-bank holding company. The Banks offer a full range of general retail and commercial banking services, including deposits, loans, equipment leasing and financing, and credit cards. Fulton operates in Pennsylvania, Maryland, Delaware, and New Jersey.

The Bank of East Asia, Limited and its subsidiaries provide general banking, related financial, business corporate, and investor services.

Huishang Bank Corporation Limited is a commercial bank. The Bank provides banking services including loans, money market operations, treasury business, investment and trading services, and valet transactions.

Hong Leong Financial Group Berhad is a banking and financial services holding company. The Company provides a range of services including commercial and consumer banking, investment banking, and insurance broking. Through its subsidiaries, Hong Leong Financial underwrites life/general insurance, provides funds management, corporate advisory, and stock and share broking services.

Ameris Bancorp is a multi-bank holding company. The Banks provide a broad range of retail and commercial banking services to its customers, including checking and savings deposits, commercial and consumer loans, trust services, discount brokerage services, and electronic funds transfer services. Ameris Bancorp operates in Georgia, Florida, and Alabama.

United Community Banks, Inc. is a multi-bank holding company with locations throughout north Georgia and western North Carolina.  The Banks are community oriented and offer retail and corporate banking services including checking, savings, and time deposit accounts, secured and unsecured loans, wire transfers, trust services, and rental of safe deposit boxes.

Associated Banc-Corp is a Midwest banking franchise headquartered in Green Bay, Wisconsin. The Bank offers a full range of financial products and services through banking locations serving communities throughout Wisconsin, Illinois, and Minnesota, and commercial financial services in Indiana, Michigan, Missouri, Ohio and Texas.

ServisFirst Bancshares Inc. operates as the holding company for ServisFirst Bank that provides consumer and commercial banking services. The Company offers various deposit products, such as demand, time, and savings deposits, as well as negotiable orders of withdrawal accounts, checking accounts, money market accounts, certificates of deposit, and IRA accounts.

SBI Shinsei Bank, Ltd. provides banking services including deposits, loans, and foreign exchange transaction, as well as investment trust service and issuance of long-term bonds.

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SBI Shinsei Bank (8303 JP)

Japanese Bank Lending: An Ebb Tide in 2021?

The ‘dash for cash’ by large corporates appears to be over, at least in terms of lending by the major banks. Only the small secondary regionals...

J. Brian Waterhouse

The Delayed TOPIX FFW Rebalance: $32bn To Trade

The Big Annual TOPIX FFW Rebalance of October 2020 was delayed until January. The results were not terribly surprising. Nevertheless, it is a big...

Travis Lundy

Fubon Financial Offer for Jih Sun Gets Even Weirder

Fubon said they hadn't communicated with the two main holders, but would. Now Jih Sun says accountants say the bid may be light, but Jih Sun puts...

Travis Lundy

Last Week in Event SPACE: Shinsei Bank, Huifu Payment, Vedanta, Cardinal Resources, Jih Sun Finance

The weekend is upon us - pour yourself some coffee (or mulled wine) and sift through a brief summary of insights on various events discussed during...

David Blennerhassett

2021 High Conviction - Shinsei Bank

Shinsei Bank has a particular capital structure different from many other banks. This is due to shareholder register, and capital itself. A new...

Travis Lundy

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